On January 1, 2019, Mopps Corp. agrees to provide Conklin Company 3 years of cleaning and janitorial services. The contract sets the price at $12,000 per year, which is the normal standalone price that Mopps charges. On December 31, 2020, Mopps and Conklin agree to modify the contract. Mopps reduces the fee for the third year to $10,000, and Conklin agrees to a 4-year extension that will extend services through December 31, 2024, at a price of $15,000 per year. At the time that the contract is modified, Mopps is charging other customers $13,500 for the cleaning and janitorial service.
Required:
Should Mopps and Conklin treat the modification as a separate contract? If so how should Mopps account for the contract modification on December 31, 2020? Support your opinion by discussing the application to this case of the factors that need to be considered for determining the accounting for contract modifications.
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Intermediate Accounting: Reporting And Analysis
- On October 1, 2019, Grahams WeedFeed Inc. signs a contract to maintain the grounds for BigData Corp. The contract ends on March 31, 2020, and has a monthly payment of 3,200. The contract does not include any stipulations for additional periods. On June 1, Grahams WeedFeed and BigData sign a new 12-month contract that is retroactive to April 1, 2020. The monthly fee for the new contract is 4,000 per month and is also retroactive to April 1, 2020. During April and May of 2020, while the new contract was being negotiated, Grahams Weed Feed continued to maintain the grounds, and BigData continued to pay 3,200 per month. BigData was satisfied with Grahams WeedFeeds performance, and the only issue during negotiations was the monthly fee. Required: Determine if a valid contract exists between Grahams WeedFeed and BigData during April and May 2020.arrow_forwardOn March 1, 2019, Elkhart enters into a new contract to build a specialized warehouse for 7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2019, Elkhart will receive a bonus of 600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by 150,000. Elkhart provides the following completion schedule: Required: 1. Assume that Elkhart uses the expected value approach. What amount should Elkhart use for the transaction price? 2. Assume that Elkhart uses the most likely amount approach. What amount should Elkhart use for the transaction price? 3. Next Level What is the purpose of assessing whether a constraint on the variable consideration exists?arrow_forwardYankee Corp. agrees to provide Albany Company 24 months of coaching services. The contract sets the price at 4,000 per month, which is the normal stand-alone price that Yankee charges. After 16 months, Yankee and Albany agree to modify the contract. Yankee reduces the fee for the 8 remaining months to 3,800 per month, and Albany agrees to a 24-month extension at a cost of 3,600 per month. At the time that the contract is modified, Yankee is charging other customers 3,750 per month for the coaching service. Should Yankee and Albany treat the modification as a separate contract?arrow_forward
- On January 1, 2019, Piper Company entered into an agreement with Save-Mart to sell its most popular product, the gadget. The contract stipulates that the price per unit will decrease as Save-Mart purchases higher volumes of the gadget, as follows: The contract states that Save-Mart pays Piper the unit price based on the current sales volume. Once a volume threshold is reached, the price is retroactively reduced to the applicable price per unit. Based on its past experience with similar contracts, Piper believes that the total sales volume for the year will be 1,800 units and uses the most likely amount approach to estimate variable consideration. In addition, Piper concludes it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty surrounding the variable consideration is resolved. Required: 1. Determine the transaction price per unit that Piper should use to record revenue. 2. Assume that Save-Mart purchases 800 units in the first quarter of 2019 and 900 units in the second quarter of 2019. Prepare Pipers journal entries to record the sales in the first and second quarters. 3. Given the higher than expected sales volume in the first half of the year, Piper increases its estimate of the sales volume to 2,800 units. Prepare the journal entry to record this change in estimate.arrow_forwardDiamond’s Pizza Inc. enters into a franchise agreement on December 31, 2019, giving Domino Corp. the right to operate as a franchisee of Diamond’s Pizza for 5 years. Diamond charges Domino an initial franchisee fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is payable when Domino Corp. signs the agreement, and the balance is payable in five annual payments of P57,000 each on December 31.Consider the following for allocation of the transaction price at December 2019.Rights to the trade name, market area, technical and propriety know-how P190,000.00Services – training, etc 94,591.50Machinery and equipment etc. (costing, P95, 000) 133,000.00Total Transaction price P417,591.50The credit rating of Domino indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P57,000 each discounted at 8% is P227, 591.50. The discount of P57,408.50 represents the interest revenue to be accrued by Diamond’s Pizza Inc.…arrow_forwardOn January 1, 2020, Gordon Co. enters into a contract to sell a customer a wiring base and shelving unit that sits on the base in exchange for $3,000. The contract requires delivery of the base first but states that payment for the base will not be made until the shelving unit is delivered. Gordon identifies two performance obligations and allocates $1,200 of the transaction price to the wiring base and the remainder to the shelving unit. The cost of the wiring base is $700; the shelves have a cost of $320. Instructions a. Prepare the journal entry on January 1, 2020, for Gordon. b. Prepare the journal entry on February 5, 2020, for Gordon when the wiring base is delivered to the customer. c. Prepare the journal entry on February 25, 2020, for Gordon when the shelving unit is delivered to the customer and Gordon receives full payment.arrow_forward
- On October 10, 2020, Flounder Co. entered into a contract with Belisle Inc. to transfer Flounder’s specialty products (sales value of $9,200, cost of $6,500) on December 15, 2020. Belisle agrees to make a payment of $5,400 upon delivery and signs a promissory note to pay the remaining balance on January 15, 2021. What entries does Flounder make in 2020 on this contract?arrow_forwardOn January 2, 2020, Cluckin' Bells Company entered into a franchise agreement with Mr. Princeton to sell their products. The agreement provides for an initial franchise fee of P2,500,000, payable as follows: P700,000 cash to be paid upon signing of the contract, and the balance in five equal annual payments every December 31, starting December 31, 2020. Cluckin' Bells Company signs 15% interest bearing note for the balance. The agreement further provides that the franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales. On October 29, the franchisor completed the initial services required in the contract at a costs of P800,000, and incurred indirect costs of P160,000. The franchisee commenced business operations on November 2, 2020. The gross sales reported to the franchisor are November sales, P82,000 and December sales, P95,000. The first installment payment was made in due date. The collectability of the note is reasonably assured. 19. In its income…arrow_forwardOn 1 July 2019, Entity A entered into the Contract X with a customer, Entity B, to sell Product A for $300 per unit. If Entity B purchases more than 1,000 units of Product A in a 12-month period, Contract X specifies that the price will be reduced to $250 per unit. Entity B agreed to settle all outstanding amount of Contract X in July 2020 when both Entities agreed with the total units of sales on 30 June 2020. For the quarter ended 30 September 2019, Entity A sold 70 units of Product A to Entity B. At that date, Entity A concluded that Entity B's purchases would not exceed the 1,000 unit threshold required for the volume discount. In October 2019, Entity B acquired another production unit which increased the demand for Product A from Entity A. On 30 November 2019, Entity B ordered an additional 900 units of Product A from Entity A. In light of this, Entity A concluded that the customer's purchases are now highly likely to exceed the 1,000 unit threshold in the 12 months to 30…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning